Management

Early in January, the Election Defense Alliance sent an alert to its supporters saying, “All our funds, which had been held… by the 501(c )(3) umbrella organization International Humanities Center, have been misappropriated by that organization and lost.”

Unfortunately, they are not alone.

The International Humanities Center (IHC) was a fiscal sponsor for 200 groups, largely politically or culturally progressive activist organizations, all of which were blindsided by the news that the IHC had gone out of business. With it, the funding that the Center held and managed for these groups largely evaporated.

Aside from the Election Defense Alliance, the 200 groups also included the Afghan Women’s Mission, Courage to Resist, the National Network Opposed to Militarization of Youth, Global Voices for Justice, the Prisoners Revolutionary Literature Fund, the Alliance for Bases Clean-up, the Amazon Fund International, Champions Against Bullying, Public Lands Without Livestock, and the Fair Trade Festival.

They all counted on the IHC’s nonprofit legal and accounting structure to receive and deposit charitable donations in restricted accounts on their behalf and to respond to requests for disbursements to pay their bills. In return, the IHC received a ten percent fee. It was a fairly straightforward arrangement, and until December, most of the projects were satisfied with the Center’s service and considered its CEO, Steve Sugarman, a supporter, ally, or even friend. But then approximately $1 million disappeared.

What is the International Humanities Center?

In order to understand what happened with the IHC and the groups whose money it held, it’s important to know that fiscal sponsors are established nonprofits that provide their own tax-exempt status and often a significant back-office accounting and fund management service to smaller groups on a fee-based contractual basis. The fiscal sponsor receives grants and donations for the “projects” or “programs” that it sponsors and then typically makes payments to the staff, vendors, and contractors on the projects.

Founded in 2003, the International Humanities Center was a low profile fiscal sponsor. While not as well known as the Tides Center in San Francisco or Third Sector New England in Boston, it wasn’t small. The Center processed as much as $5 million a year for its affiliated projects. With a mailing address in Woodland Hills, Calif. (previously in Malibu), and an office located in Pacific Palisades, the Center processed grants and expenses for hundreds of projects during its existence. It grew from revenues of $599,788 in 2003 to as high as $5,253,670 in 2007, although revenues then declined to $3,451,798 in calendar year 2009. That year, the largest disbursements were more than $400,000 for Voter Action (a group focusing on election vote count accuracy), $329,700 for the Palast Investigative Fund (which supports independent journalism examining electoral and economic issues), and $150,000 for Soldier’s Heart (which supports programs for integrating veterans back into their communities).

The IHC’s list of projects numbered as many as 300 by some reports, and by the end of 2011, when it became clear to some of the projects that the Center was sputtering, it still held more than 200.

In the closing months of 2011, communications between the Center and some of the projects became sporadic. By early January, some of the International Humanities Center’s projects were informed that their sponsor was out of business. The website was down and phones either weren’t being answered or were disconnected. Payments on behalf of the projects had stopped, and money was missing. Explanations of what had happened to the groups’ funds were scarce, confusing, and inconsistent.

How much was lost?

The IHC-sponsored projects are now investigating just how much of their money has been lost. A listserv that was formed for the projects’ directors tabulated losses for only a portion of the IHC projects reportedly around $1 million, according to interviews of project directors. But that number increases almost daily as the projects try to figure out how much money that they never saw or even heard about may have been donated to them through the Center.

While the approximate $1 million sum is spread across a few hundred groups, for the small, community-based activist organizations who relied on the IHC, losing tens or hundreds of thousands has the potential to devastate parts of their operations.

The story behind the IHC collapse is murky. The relatively tiny groups that lost funds are now trying to piece together what happened and put public authorities or agencies such as the California attorney general, the Internal Revenue Service, and even the Federal Bureau of Investigation onto the task of chasing down the IHC’s executives, managers, accountants, and lawyers.

What Happened?

The news of the IHC’s collapse struck most, if not all, of the IHC-affiliated projects as a complete shock. Staff or board members at the IHC projects we contacted were unanimously stunned, “blindsided,” and bewildered. What went wrong?

Peaceful Uprising, which focuses on nonviolent direct action on environmental issues, was among those contracted to the IHC . In November, Peaceful Uprising started to notice last that IHC was developing a pattern of delaying payments on bills and failing to respond to communications. It apparently didn’t take long before Peaceful Uprising figured out that the IHC was “unable to give us access to the [money donated to Peaceful Uprising]…or to return them—which has left us unable to pay our small staff, rent for our space, or any other expenses.”

According to Peter Rothberg, a columnist for The Nation, some of the 200 projects that used the IHC as their fiscal sponsor “have been financially wiped out in an astonishing act of apparent fraud.” His summary of the fraud is that the 501(c)(3) Center “spent the money donated to Peaceful Uprising on its own, highly suspicious operating costs.”

Groups didn’t report major problems suggesting a collapse until December when communications between the Center and the projects became strained, payments to vendors became slow or nonexistent, and then the IHC CEO himself, Steve Sugarman, sent some of the projects a letter that stunned even those that hadn’t suffered any lagging financial transactions.

Sugarman’s December 15th letter to some of the projects acknowledged that the “IHCenter has fallen behind on fulfilling payment requests in a timely manner,… [a] situation [that] has grown increasingly critical in the last few months.” He told groups that the center was “running a considerable deficit that has severely impacted all operations.”

“[The] letter perhaps should have been written long before this,” Sugarman wrote, “ but deep concern for the distress it would cause everyone prevented me from doing so.” He called on projects to help him “stop [the bleeding] so the patient can heal,” implying that timely payments would not be restored immediately because of a need to reduce the organization’s deficit. He “beg[ged the] patience and cooperation” of the projects and asked them not “to contact me or other staff members with…anger.”

Other than saying that he was forgoing his salary, Sugarman offered no specifics as to how the fiscal sponsor of the more than 200 organizations would rectify its financial distress, closing his letter with a remarkable statement: “Beyond the anger and betrayal you will undoubtedly feel, thank you for working with us, and allowing us the space to rebuild this organization.”

One month later, the story changed. There was no rebuilding of the Center going on. On January 16, Sugarman sent another letter, again only to some of the projects, announcing “that IHCenter will soon be closing its doors.” The “work will continue,” Sugarman added, but “IHCenter can no longer be the vehicle that it has been in that endeavor due to multiple circumstances and issues that were largely unanticipated and/or beyond our control.”

As in the December letter, Sugarman offered an explanation of sorts for the surprise announcement of the Center’s closing, which presumably was in the works sometime before: “This letter would have gone out weeks ago were it not for the difficulty of seeking counsel through the holidays, and in reaching a consensus amongst the various attorneys consulted,” Sugarman wrote. “No radio silence was ever intended.”

Sugarman pledged that, “Recently received donations will be returned or redirected to the appropriate destination.” In response to his sense of “misunderstandings, misstatements and conjecture about IHCenter floating around,” Sugarman affirmed that “all funds were used solely to benefit the projects and their support, and to maintain IHCenter and its tax exempt status,” implicitly contradicting the idea that the Center had diverted any moneys that had come in for the projects to pay for other costs.

However, if the Center had not diverted the money, it would have been able to return the funds collected for its projects—or transfer them to some other fiscal sponsor that would take on its assorted projects—and call everything even.

But some of the projects say they are aware of moneys that were held by the IHC that they were not paid, according to an ever-increasing spreadsheet of project losses made available to Nonprofit Quarterly. The groups’ spreadsheet counts over $890,000 owed to 45 of the projects, including a high of $404,967 owed to the Afghan Women’s Mission, $80,000 to Peaceful Uprising, $40,000 to the Palast Investigative and $31,151 to the Election Transparency Coalition. The groups are trying to contact others on the IHC project list.

“Donations continue to be solicited outside the organization on behalf of all projects,” Sugarman’s letter added. “As funds become available they will be directed toward project balances, so that your work can continue under a new fiscal sponsor. There is no definite timeframe as to when this will occur.” Instead, he promised to keep the projects “apprised.”

Deena Metzger of Mandlovu, one of the IHC-affiliated projects, wrote to her group’s supporters and constituents about the impact of the IHC situation on her organization—which lost everything, Metzger wrote—and on other projects: “As organizations do not use the funds donated to them in the moment they are received, and there is a complicated system of billing and receiving distributions, many of the organizations with IHC have lost a great deal of money. Tatenda - which is the organization supporting the African nganga, Mandaza Kanenwa… has lost almost all the funds it raised this year to support Mandaza, his family and community [Note: The spreadsheet puts the Tatenda loss at $60,000]. Topanga Peace Alliance lost all their assets and the rent that was to be paid each month to the Topanga Community House was not paid since spring. Headwaters lost its scholarship fund. Another organization lost all the funds designated for a solar village experiment station. These are the ones I know about.” Mandlovu itself reports being out $20,000.

None of the several IHC-affiliated project leaders contacted by Nonprofit Quarterly say that they have heard from Sugarman about his progress to make up the funds that they lost, or anything else for that matter. The IHC website appears to be down and all links through the IHC website to descriptions of projects sponsored by the IHC don’t seem to work. On Guidestar, the last posted 990 for the IHC is from 2009, which may or may not mean that the organization may be having some difficultly presenting its financial picture in a timely and complete way. NPQ called two telephone numbers listed for Sugarman and the Center. One was disconnected, and the other was a “textPlus” number to which we sent a message that got no response. NPQ sent an inquiry to Sugarman’s IHCenter e-mail address as well, to no avail.

Causes of Demise

Clues as to what might have caused the organizational bleeding that Sugarman referred to are scattered throughout various documents and e-mails. According to its 990 for 2009, the IHC started 2009 with $598,387 in cash, but ended the year with only $103. At the beginning of the year, it held $691,934 in savings and temporary cash investments, but by the end, that number was down to $456,119, a decline of more than one-third. Basically, over $830,000 in cash evaporated that year; in comparison, both numbers barely budged in 2008, despite the nation’s fiscal collapse in the fourth quarter of that year. Was it the economy, or something more?

Between 2008 and 2009, contributions and grants reported by the IHC dropped from $4,958,494 to $3,451,798 (down 30.2 percent), its program service revenue fell from $1,054,625 to $537,446 (down 49.0 percent), and total overall revenues dropped from $6,235,623 to $3,960,031 (down 36.5 percent). That was the beginning of the recession to be sure, but those are eye-popping financial declines—and we don’t know what the organization’s 990s might have shown for 2010. None of the projects contacted by NPQ indicated that their donors had disappeared in that kind of magnitude. The 2008 and 2009 declines in IHC revenues suggest something more than the downward spiral of the recession. The organization cut its overall expenses between 2008 and 2009 by 36.2 percent, but were unfulfilled financial commitments to the organizations IHC sponsored beginning to pile up?

In a 2009 interview given to OpEdNews (ironically, an IHC-affiliated project that may have lost $10,000 in this situation), IHC CEO Sugarman said, “Tough times call for tough decisions. The folks remaining full-time at IHCenter are highly qualified and dedicated. Those of us on sabbatical (myself, as Executive Director, and the Project Liaison) continue to work as much as possible unpaid. Yet the reality is that working without pay only lasts so long. So there is a juggling act between IHCenter responsibilities and finding other sources of income. I’m at that stage now. The irony is that last Summer (2008), IHCenter was invited to submit a grant proposal that will provide three years of capacity building and infrastructure development. We were approved for this funding, right at the exact moment the economy backslid. The grant has been delayed ever since. We still hold out hope and vision that it will arrive.”

Did Sugarman and his colleagues, in some kind of Ponzi-like scheme, begin to draw on the funding they had received for the sponsored projects while they waited for the economy to turn around and this unnamed grant to emerge? Were accounts that should have been kept separate for each of the sponsored groups co-mingled and used for IHC operating expenses, leaving the projects without access to moneys that were legitimately theirs?

What really happened to the IHC and its moneys? Beyond Sugarman, what have the leaders of the International Humanities Center—listed by Guidestar as David Tanner, Dave Sanders, Catherine Carroll (Renaissance Foundation), Katherine O’Flaherty, and Tim Hall (Paulownia International Ltd.)—had to say about the statements from Peaceful Uprising and EDA? Who are these leaders of the IHC? We found Dave Sanders listed as president, and Cathy Carroll listed as secretary, of the Renaissance Foundation in Nevada, but its status as a nonprofit organization has been “permanently revoked.”

These indicators suggest something more than the impact of the economy, instead pointing to underlying problems that seem to have existed independently of the economic downturn of 2008 and 2009. Sugarman’s January letter referred to a three-year IRS audit of the Center that he contended “had nothing to do with cash flow issues, but certainly exacerbated them in terms of resources spent for staff time and related accounting and legal expenses.” Three years of IRS auditors laying siege to an organization is usually an indication of something that is less than salutary about the organization’s finances. Had the IRS caught onto something in the IHC’s fiscal operations?

Sugarman’s letter also referred to “some internal management issues that necessitated a change in key personnel in the midst of these multiple challenges that has resulted in this crisis.” He described the management issues as interrelated with the other problems, including the IRS audit.

On March 16, 2009, Dave Sanders, the IHC director of operations, sent an email to IHCenter projects announcing Steve Sugarman’s sabbatical, which had started on March 2nd. Sanders announced that he would assume executive director functions and assured IHC projects that the staff was trained and prepared to handle all incoming requests, but added that under his direction the Center would be “restructuring its administrative systems to increase efficiency and improve responsiveness to all Projects.” A year later, Sugarman wrote to the projects with this instruction: “Dave Sanders is no longer employed by nor affiliated with IHCenter. Please do not contact him. If he makes contact with you please do not engage or respond, and please let me know immediately.” The story behind that seems to be partly related to unconfirmed but widely circulated allegations that Sanders was either a party to—or a victim of—a scam that caused the loss of hundreds of thousands of IHC-held dollars.

At roughly the same time, the Center was looking to expand. It moved into new offices in Pacific Palisades, reportedly signing a long-term lease to overcome one aspect of what Sugarman described as the Center’s “explosive growth from 2005-2008, without an adequate infrastructure.” Rob Kall of OpEd News and others have suggested that the IHC’s leadership thought that the organization was heading toward major growth and needed a larger office and other accoutrements to attract investment capital from an angel investor to propel the IHC to new heights.

Sugarman told OpEdNews that in 2008 a foundation “invited” the IHC to apply for a three-year grant that would have supported “capacity building and infrastructure development,” but the grant was delayed—apparently permanently—with the advent of the recession. At that moment, at the height of the recession, Sugarman was envisioning “sponsoring in excess of 1,000 projects by 2012” as a result of the foundation grant, the angel investor, or both.

Ponzi In and Ponzi Out

Despite Sugarman’s official written contention that no moneys were diverted or misused, the projects tell a different story—one which makes the IHC look like the operational equivalent of a Ponzi scheme.

Representatives of IHC-affiliated projects have written the California attorney general outlining their version of the story. In a draft of correspondence seen by Nonprofit Quarterly, the project directors reported on various conversations with Sugarman. In one, he allegedly assured the groups that he would raise moneys, apparently outside of the International Humanities Center, to ensure that outstanding invoices were paid and all groups would have access to their accounts. The directors also reported that Sugarman did confirm that the Center was out of money. In December, they reported at a meeting that Sugarman said that the organization owed $1 million to the projects (confirming estimates told to NPQ in interviews) but only had $10,000 in the bank. He pledged that the organization would stop collecting donations on behalf of the projects in December, but the IHC’s website apparently continued to collect donations until January 17th.

The particularly damaging part of the IHC story is that these projects, like many typical nonprofits, received the largest part of their donations at the end of the calendar year. As the IHC slid into insolvency at the end of the year, it seems likely that it may have had access to the largest inflow of charitable donations that the projects were supposed to have been receiving.

How Did This Happen?

The Center-sponsored projects chose fiscal sponsorships because they didn’t want to deal with the mechanics and accounting of setting up and running 501(c)(3) organizations. As Gregory Wragg of STREATS, a Washington, D.C.-based organization giving homeless individuals voice through social media and videography, described it, his expertise is the “subject matter of homeless individuals.” He chose the International Humanities Center as the fiscal sponsor for STREATS because he simply “didn’t want to get involved” with organizational management and finances. The IHC’s fiscal sponsorship would take all of those functions off his hands.

According to Wragg, STREATS may have lost $6,000 in what he calls the “fiasco.” It isn’t a large number, but it means something very important to the organization. The group’s total budget is only around $50,000, making the loss of $6,000 painful. Wragg suggests that unless some people choose to provide their services on a pro bono basis, he might have to reduce or shut down STREATS programs such as their GED and financial literacy classes.

Remarkably, despite what appears to be a cascading litany of financial mismanagement at the Center, Wragg and other project directors do not seem to harbor any personal animus toward Sugarman, despite Sugarman’s frequent references in his communications to concerns about anger from the projects that the Center left without access to moneys that were clearly theirs. In fact, some referred to Sugarman as a friend. Until the Center’s rapid descent into insolvency, most said that they had little or no problems with the Center’s reporting, transparency, and bill-paying.

The reality is that most of these projects trusted the Center. They hired the International Humanities Center and off-loaded their financial and managerial work to it because they had no capacity and no interest in pursuing the technical functions of operating 501(c)(3) charities. They had no capacity to do the due diligence and monitoring that would have been required to discover that the IHC’s problems weren’t just in December, but were probably evident in financial decisions and dysfunctions dating back to 2008, if not even earlier.

There are questions about the IHC and its leadership, but the larger story may be the lessons from the IHC imbroglio about the system of nonprofit fiscal sponsorship. How are activists who have little or no capacity or interest in financial management to vet and monitor fiscal sponsors in order to ensure that they are functioning responsibly? What standards do fiscal sponsors hold themselves to that potential projects can look at when seeking to assess reliability? Given the vulnerability of the small projects that rely on fiscal sponsors like the IHC, who is monitoring the fiscal sponsorship industry to ensure that this vital service for activist organizations doesn’t morph into financial scams, mismanagement, and situations resembling Ponzi schemes?

In Part II of our coverage of the IHC story, we will analyze the lessons to be learned by both sides of the fiscal sponsorship equation.